Statement of Cash Flows Summary

Lesson: Statement of Cash Flows Summary

In this lesson, Nick Palazzolo, CPA, breaks down the structure and logic behind preparing the Statement of Cash Flows using both the direct and indirect methods. He outlines the flow of cash within a company, starting with cash receipts from customers to various expenses and investments. Nick simplifies the complex process of adjusting net income for non-cash items such as depreciation and gains or losses on asset sales. By explaining how changes in current assets and liabilities affect cash flow, he effectively demystifies the thought process behind these accounting entries. Furthermore, he clarifies the treatment of financing and investing activities, ensuring a comprehensive understanding of this essential financial statement.

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Video Transcript

Instructor: Nick Palazzolo

Nick Palazzolo is head instructor of ExamPrep.ai CPA Review. Nick's teaching style is engaging & upbeat, combining practical Big 4 tax & assurance expertise with years of 1-on-1 coaching. His lessons are concise and emphasize what you need to know to pass. Whether you're a recent grad or working full-time, we’re confident you can conquer your CPA exams with Nick’s review.

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We're not using numbers yet, but this is a phenomenal way to look at the direct and indirect methods of cash receipt. This is basically how, this is the step-by-step process and how generally you'll see it on the statement. Cash receipt from customers, cash paid, etc., all of that, and there you get to your ending number. This one again, pretty straightforward, right?

You just look at all the journal entries, you look at the transactions, you look at the balance sheet and see what is going in and coming out. Indirect methods. So record net income and then you adjust net income for noncash items such as depreciation, impairment of goodwill. We saw that, right? Because that's not a real expense, there's no cash going out the door. Step three reverse the income statement. Gains or losses shown on the sale of any asset, right? Because yes, you're going to bring cash in when you sell an asset, but generally speaking, you're going to also recognize a gain or loss for the additional basis of whatever you purchased it for. And the gain or loss is essentially if you want to think about it in terms of tax, what you'll be taxed on. But we don't care about that in this test. We don't care at all.

Adjust for changes in current assets and current liabilities, bearing debt recorded in financing activities. So right here, current assets increase, we are going to subtract those out. When current assets decrease, we are going to add those back. Similarly for current liabilities, when they increase, we are going to add them and then current liabilities decrease, we will subtract them. Think about where the cash is going, right? If a current liability is increasing, that means we are not spending cash

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